S4 - Corporate governance Flashcards
What is the theory of shareholders according to Milton Friedman?
- The company is owned by the shareholders
- The objective of governance is to maximize shareholder investment
- Financial approach of the company
- Only the interest of the shareholders must be taken into account in governance (or at least taken into account first)
What is the theory of stakeholder according to Milton Freeman?
The company, as a legal person, pursues its own objectives, which may go beyond the interests of the shareholders.
The central premise of this theory is that organizations are made up of multiple stakeholders, all of whom contribute to the success of the business, and therefore have a legitimate right to be taken into consideration by it (conversations and compromises).
What is the objective of the stakeholder theory?
Make companies aware of their responsibilities and the impact of their business practices on each of the stakeholders and maintain a dialogue with them
What is one criticism of the stakeholder theory?
The company is at the centre of many stakeholders, with whom it must maintain links and pursue dialogue.
The final objective remains ORGANOCENTRIST:
The company remains at the centre of the model. Stakeholders are considered in the interest of the business only.
Who are the primary/internal stakeholders?
An interest group made up of any identifiable individual or group of individuals on which an organization is dependent in order to ensure its sustainability
Examples:
Employees, customers, suppliers, shareholders, financial institutions, etc.
Who are the secondary/external stakeholders?
Interest group formed by any identifiable individual or group of individuals who may affect the achievement of an organization’s goals or be affected by the achievement of those goals.
Examples:
Industry, pressure groups, local and international communities, governments, unions, competitors, media, NGOs, etc.
And according to certain theories:
The environment, animals, future generations, etc.
What are the three things to consider when classifying stakeholders?
Power, Legitimacy, and Urgency
What is governance?
Governance, in its fiduciary form, consists of implementing all the means so that an organization can achieve the purposes for which it was created, in a transparent, efficient manner that respects the expectations of its stakeholders.
Governance is therefore made up of accountability rules and operating principles put in place by the board of directors to decide on the organization’s strategic directions, ensure management supervision, assess its economic and social performance and promote the emergence of values of probity and excellence within the organization.
What is corporate governance?
“Corporate governance is about the whole set of legal, cultural, and institutional arrangements that determine what public corporations can do, who controls them, how that control is exercised, and how the risks and return from the activities they undertake are allocated.“
“Corporate governance is the relationship among various participants [chief executive officer, management, shareholders, employees] in determining the direction and performance of corporations.”
“By corporate governance, we mean ‘the formal structures, informal structures, and processes that exist in oversight roles and responsibilities in the corporate context.”
What is the difference between principals and agents? What is the agency problem?
Principals: The people who control the management, typically equity owners. They delegate authority, hire, and assess agents.
Agents: The people who manage corporate resources, usually management. They make decisions and ensure performance.
Agency problem: When the desires of goals of the principal and agent conflict, it is difficult/expensive for the principal to verify what the agent is actually doing.
- Asymmetry of information: managers usually know more about the firm than equity holders.
- Effort: “Minimum I can get away with” vs “Above and beyond the call of duty”
- Horizon: Tendency of managers to favour short-term over long-term interests
- Risk aversion: Managers typically more risk averse, may favour organizational maintenance over performance
- Use of assets: Organizational growth vs personal gain (perks, bonuses, prestige, etc.)
What is the agency theory?
Agency theory is most relevant in situations where
- contracting problems are difficult, e.g. when there is substantial goal conflict between principals and agents (i.e. where agent opportunism is likely)
- sufficient outcome uncertainty triggers risk implications theory (e.g. new product innovation, young and small firms, recently deregulated industries)
- there are unprogrammed or team-oriented jobs in which evaluation of behaviours is difficult.
Agency theory is partial view of the world, works best when used in a complementary way. Additional perspectives needed to capture greater complexity of organizations.
Key assumptions of agency theory: self-interest, goal conflict, bounded rationality, information asymmetry, preeminence of efficiency, risk aversion, information as a commodity
What are the three pillars of good governance?
- Structure: Board of directors
- Regulation: Legal and regulatory framework
- Good will : ethics
What are the responsibilities of board of directors? Its duties?
Responsibilities:
* Approving strategy, plans, budgets and monitoring performance
* Approving major capital expenditures
* Approving capital structure, dividend policy and accuracy/transparency of financial statements
* Ensuring that major risks to company are identified and managed
* Appointing and evaluating CEO
* Approving senior executive compensation
* Ensuring compliance with legal and community requirements and establishing ethical standards
Duties:
* Fiduciary duty: Obligation to take exemplary care of the best interests of the shareholders and the organization
* Duty to seek information
* Duty of care and diligence
